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Thursday, March 01, 2007

Indian Bank Bulk Deals

INDIANB,Indian Bank,Citibank International Plc. A/c Global Emerging Markets Equi,BUY,5700000,93.43,-

MindTree Consulting IPO Allotment

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Edelweiss - Post Budget

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Merrill Lynch - Model Portfolio - ITC

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Golman Sachs - Budget Review

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Market witnesses a bounce

The Sensex, which showed signs of recovery by opening with gains of over 142 points, failed to hold on to its early gains on relentless selling in heavyweight and cement stocks and touched an intra-day low of 12861. The index pared some losses in the afternoon but fell sharply on profit booking at higher levels in cement, auto and consumer durables stocks. Substantial buying in Wipro, TCS, Reliance Communications and Satyam Computer restricted the southbound journey and the Sensex notched up significant gains in late trades to touch an intra-day high of 13193. The Sensex closed with gains of 221 points at 13160, while the Nifty gained 66 points and closed at 3811.

However, the market breadth was negative. Of the 2,614 stocks traded on the BSE 1,407 stocks declined, 1,143 stocks advanced and 64 stocks ended unchanged. Among the sectoral indices the BSE IT index surged 4.13%, the BSE Teck index jumped 3.36%, the BSE Bankex added 2.75% and the BSE CD index was up 2.04%. However, the BSE Auto index shed 0.77%.

Several index heavyweights notched up significant gains on fresh buying support. Among the major gainers TCS soared 5.65% at Rs1,256, Satyam Computers surged 5.47% at Rs435 and HDFC Bank jumped 5.20% at Rs981. Reliance Communications and Wipro added 5.09% each at Rs428 and Rs589 respectively. Infosys at Rs2,153, L&T at Rs1,540, ICICI Bank at Rs855, Tata Steel at Rs452 and NTPC at Rs142 gained 2-3% each.

Select counters came under selling pressure and ended in the red. Bajaj Auto tanked 3.93% at Rs2,514, Gujarat Ambuja declined 3.62% at Rs112, ACC dropped 2.61% at Rs877, Dr Reddy's slumped 2.10% at Rs663 and Hindalco shed 1.75% at Rs137.

The IT counters rallied sharply. Mphasis soared 7.79% at Rs279, HCL Technologies jumped 5.96% at Rs632, Tech Mahindra added 3.95% at Rs1,491 and Patni Computer gained 1.92% at Rs429.

Value-wise Indian Bank registered a turnover of Rs287 crore on the BSE followed by Reliance Industries (Rs203 crore), ACC (Rs121 crore), Bajaj Auto (Rs97 crore) and Reliance Communications (Rs89 crore).

Market puts Budget behind

All's well that ends well. The Sensex, which had been on a downtrend ever since striking an all-time high (14,723.88) on 9 February 2007, rebounded with great force today. Bargain-hunting for battered index pivotals and short-covering in the derivatives segment helped to reverse the downtrend.

The 30-shares BSE Sensex settled 221.46 points higher, at 13,159.55. It had also surged to a high of 13,193.13. Most of the gains came in the second half of the day’s trading session, triggered by short-covering. Volatility was also at its best today.

The S&P CNX Nifty surged 65.90 points, to 3,811.20.

The total turnover on BSE amounted to Rs 4097 crore as compared to Rs 5826 crore on Wednesday (28 February).

The market-breadth, which had turned weak, kept on recovering as the day progressed. On BSE, 1,435 shares were in the red, and 1140 ended in the green, while 67 scrips remained unchanged. The BSE Small-Cap Index closed at 6,712.86, up 7 points (0.1%), while the BSE Mid-Cap Index ended at 5,522.59, 14 points (0.25%) higher.

Among the 30-Sensex pack, 19 advanced while the rest declined.

Private sector HDFC Bank was the top gainer, up 5.10% to Rs 980, on a volume of 1.34 lakh shares.

IT stocks made a solid comeback after Wednesday (28 February 2007)’s meltdown, under the reckoning that their earnings will be impacted only to a small extent following an increase in their tax burden.

While Satyam Computer rose 4.24% to Rs 430, Wipro gained 4.16% to Rs 584. Top software firm TCS added 5% to Rs 1248, and heavyweight Infosys gained 3.40% to Rs 2149.

In Budget 2007-08, the Union Government has extended minimum alternate tax (MAT) to income in respect of which deduction has been claimed under sections 10A and 10B, to the IT sector.

Currently, tax exemption under section 10A is available for units set up in software technology parks (STP). The benefit under this sector expires in 2009. Effective tax rates for IT companies as a result will go up and impact earnings. However, those companies paying tax outside India will get some respite on account of a double taxation avoidance treaty. Such firms can set off the tax paid outside India against the MAT.

To top it, the government also brought employee stock options (ESOPs) under the fringe benefit tax (FBT). FBT will now be charged on the difference between market price and exercise price of the option. This will, consequently, increase the tax outgo of companies that have an ESOP scheme.

CLSA has forecast a small cut in its projected FY-2008 EPS of three IT firms: TCS, Wipro and Satyam Computer, by 1 - 1.5%. It kept the projected EPS of Infosys for FY-2008 unchanged at Rs 88.10.

The outlook for the IT sector remains bright due to strong demand for outsourcing. Indian IT firms are increasingly getting large outsourcing deals. The IT services industry is expected to achieve 31% growth in FY-2007, of which exports alone are expected to grow by more than 33%, to $31 billion.

Meanwhile, Satyam Computer Services’ BPO subsidiary, Nipuna Services, established its fourth facility at Hyderabad. The Hyderabad facility will provide integrated service delivery across industries and processes, and will accommodate three shifts. Its current capacity is 1,730 seats, but is designed for scalability.

Reliance Communications surged 4.5% to Rs 426, on hope of a cut in annual license fees for wireless services in the coming months. The finance minister proposed setting up a committee to consider reduction in fees and spectrum charges for wireless telephony, in order to align them with international rates. At the moment, wireless companies pay 6-10% of net revenues as license fee and 2-6% as spectrum charges, based on the circle and the spectrum used. The Department of Telecom (DoT) favours a 6% annual license fee compared to the existing 6-10%, and is likely to recommend a cut. But the final call on this will be taken by the finance ministry.

Bharti Airtel gained 1.13% to Rs 726.85, on similar expectations.

L&T rose 3.25% to Rs 1535, as the company will not be impacted by withdrawal of tax benefit to civil construction firms. The L&T stock had tumbled on Wednesday (28 February) due to a broad decline in construction shares after a clarification that tax benefit under section 80 IA will not be available for companies engaged only in civil construction work. But since L&T pays corporate tax at the regular rate for its construction business, it has nothing to lose from withdrawal of tax exemption for civil construction firms. The stock surged today after this fact dawned upon the market. L&T is also seen benefiting from the government’s thrust on creating infrastructure.

Shares from the cement sector, which have borne the brunt of the market's wrath of late, continued to fare badly despite news reports that producers had raised cement prices. While Gujarat Ambuja Cements dropped 2.37% to Rs 113.20, Grasim lost 0.60% to Rs 2200 and ACC shed 2.67% to Rs 876.

ACC saw cumulative volume of 13.80 lakh shares, after two block deals of 2.70 lakh shares each, were struck in the counter at an average Rs 902.50 per share in opening trade.

Cement scrips had tumbled on Wednesday (28 February 2007), after the government announced a differential excise duty structure for the commodity based on retail prices. Cement makers hiked prices as the differential excise duty raised the excise duty burden for cement makers by Rs 12 per 50 kg bag. The excise duty has been raised to Rs 600 per tonne against a retail price of above Rs 190 per bag.

On Wednesday (28 February 2007), ACC had lost 6.3% to Rs 900.05, Grasim 5% to Rs 2212.60 and Gujarat Ambuja Cements 7.7% to Rs 115.95.

Cement scrips have turned bearish with the government keeping a tab on spiralling cement prices. In late-January 2007, the Central Government had abolished 12.5% import duty on cement, in a bid to rein in domestic cement prices.

As per media reports, cement makers have raised product prices. Prices in western and northern India have been raised by Rs 12 per 50 kilogram bag from 1 March 2007. The average wholesale price of cement in Mumbai, after the increase, will be Rs 233 per 50 kg bag, and the retail price Rs 245 per bag.

Just before the latest hike, the average retail cement prices in India hovered at Rs 210 per bag, necessitating a price rise following the hike in excise duty. The current demand-supply situation distinctly favours the cement sector. While no major supply is expected for some time, demand remains strong.

The passing of the additional excise duty burden to customers will protect margins, which are currently quite high due to firm year-on-year cement prices, but may not be enough to bring down inflation. This may force the government to take more stringent steps such as a ban on exports, analysts reckon.

Analysts also opine that the Budget's thrust on farming and infrastructure augurs well for cement firms. Moreover, the abolishing of customs duty on import of coking coal will lower cost of power for cement companies. It will thus enhance the efficiencies of cement companies.

Maruti Udyog (MUL) slipped sharply from the day’s high of Rs 870, and closed 0.32% lower to Rs 837. The car maker suffered on Wednesday (post-Budget). The company had struck an intra-day high on reporting robust sales for February 2007.

MUL said on Thursday it sold 62,999 vehicles in February 2007, up 53% from 41,095 units in the same month a year earlier. Maruti sold 59,095 units in the domestic market in February 2007, up 61% from 36,608 units in the same month a year earlier. However, MUL's exports fell 13% to 3,904 units in Feb 2007 from 4,487 units in the same month a year earlier.

MUL said after trading hours on Wednesday, it will raise prices of vehicles from 15 March 2007, after the government imposed an additional cess to raise funds for education. As per the Budget, for the fiscal year starting 1 April 2007, the government will levy 1% cess on all taxes to fund secondary and higher education, in addition to the existing 2% cess, which raises funds for basic education.

MUL added it was not raising prices immediately and consumers could buy cars at pre-Budget prices, but did not specify the extent of the increase, or specify which models the hike would apply to. "In the run-up to the Budget, there was speculation that certain taxes or duties may come down," MUL explained in a statement, referring to the expectation of an excise duty cut on passenger vehicles.

Index heavyweight Reliance Industries (RIL) recovered smartly from the day’s low of Rs 1319.40. It settled 0.87% higher, at Rs 1366.35, on a volume of 15.09 lakh shares. The counter was marred by high volatility, and moved in a wide range (Rs 1319.40 - Rs 1400).

Ranbaxy Laboratories gained 1.90% to Rs 344. The Delhi-based generic drugs giant announced that PPD had acquired a worldwide license to develop, manufacture and market Ranabxy's novel statin for the treatment of dyslipidemia.

Under the terms of the agreement, Ranbaxy will be entitled to receive milestone payments upon the occurrence of specified clinical events. In the event of approval for a drug product, the Indian firm will be entitled to royalties on sales of the drug and sales-based milestones. PPD will be responsible for all costs and expenses associated with the development and commercialisation of the compound, including preclinical and clinical studies.

Bajaj Auto was the top loser, down 4.47% to Rs 2500, after reporting a 2% decline in vehicle sales for February 2007. BAL said on Thursday vehicle sales in February 2007 fell 2% to 202,212 units from 205,776 units in the same month a year earlier. The company said sales of motorcycles fell 2% to 171,780 units in February 2007 from 175,256 units, and sales of all two-wheelers fell 3% to 174,220 units from 179,880 units in the same month a year earlier.

Sales of three-wheelers rose 8% to 27,992 units in February 2007 from 25,896 units in the same month a year earlier. The company said exports rose 46% to 38,228 units in February 2007 from 26,237 units in the same month a year earlier.

BAL has been continuously gaining in share in the motorcycle market for the last five years. This gain became more pronounced in the last 18 months, and the market share today stands at 34.3%.

Hindalco Industries slipped 2.10% to Rs 136.75, after it announced that its board of directors will meet on 2 March 2007 to consider an issue of equity shares / equity linked instruments on a preferential basis.

Indian Bank settled at Rs 98.30 on BSE, a decent premium over the IPO price of Rs 91. The stock debuted at premium at Rs 105 on BSE, also its day's high. The scrip also fell to a low of Rs 77.

The Indian Bank counter saw high volumes of 3.08 crore shares. Indian Bank had priced its IPO at Rs 91, the upper end of the Rs 77 - Rs 91 price band. The issue had received strong investor response, and had been subscribed over 30 times. The face value per share is Rs 10 and the equity capital is Rs 429.77 crore. Indian Bank also entered the F&O segement from today with a lot size of 2,200 shares.

Sops extended to the food processing sector saw Britannia Industries firm up 0.50% to Rs 1242, Nestle India rising 0.14% to Rs 959.70. These stocks came-off from higher levels though.

The finance minister, in the Union Budget 2007-08, offered sops to the food processing industry such as full exemption of excise duty on biscuits whose retail price does not exceed Rs 50 per kilogram, lifting of excise duty on all kinds of food mixes, including instant mixes, such as idli and dosa mixes, while cutting duty on food processing machinery from 7.5% to 5%, and slashing customs duty on plastics and PTA/MEG from 10% to 7.5%.

The exemption of excise duty on biscuits will have no effect on biscuits whose MRP exceeds Rs 50 per kilograms. Thus, low-end biscuits like Parle-G brand of Parle and Tiger brand of Britannia, which cost Rs 4 per 100 gms (Rs 40 per kg), and some of ITC’s biscuits will benefit.

Further, this will give cost advantage to small players, including the unorganised ones in the industry.

While customs duty on crude sunflower oil has been reduced from 65% to 50%, that on refined sunflower oil has been reduced from 75% to 60%. This should lead to reduction in cost of sunflower oil, and hence a reduction in cost of fats and oils used in biscuits.

Also, a reduction in the peak customs duty of plastics from 10% to 7.5%, should facilitate reduction in packaging costs.

The food-processing sector has been given the right push in the current Budget. A growing population, powered by rising disposable incomes and rising popularity of processed foods point to a better future for the food processing industry.

Construction firm Gammon India slipped 2.12% to Rs 311, after Franklin Templeton Mutual Fund sold off 0.85% stake in the company. Post-sales, Franklin Templeton's holding in the company came down to 2.63%.

Patel Engineering plunged 10% to Rs 312.80, after the finance minister withdrew the 10-year tax exemption on firms engaged in civil construction. Construction companies are exempt from paying tax for 10 years. However, the finance minister chose to revoke this benefit for companies engaged only in civil construction.

State-run IFCI surged 11.40% to Rs 30.55, on huge volumes of 4.96 crore shares, after a substantial raise in non-plan allocation in the Union Budget. The amount for non-plan allocations has risen from Rs 225 crore in 2006/07 to Rs 1300 crore in 2007/08. The Budget document said the support will help in meeting restructuring liabilities.

Sesa Goa plunged 7.48% to Rs 1650, hit by reports that the Rs 300-export duty on iron ore will become effective immediately. It however recovered, after plunging to a low of Rs 1485.

CMC jumped 10.7% to Rs 1221.80, as the company is seen benefiting from the Budget’s emphasis on e-governance. The allocation for e-governance in the Union Budget presented on Wednesday (28 February 2007) was increased from Rs 395 crore in 2006-07 to Rs 719 crore in 2007-08.

Wockhardt jumped 8.6% to Rs 385.25, following government’s focus on the pharma sector in the Budget. The weighted average deduction of 150% under section 35 (2AB) of the income tax act for expenditure relating to in-house research and development (R&D), has been extended by five years up to 31 March 2012. This will encourage companies to focus on R&D. Excise duty exemption on life saving vaccines will benefit manufacturing companies, Wockhardt being one of them.

Mphasis BFL surged 7.7% to Rs 278.90, on value-buying after a recent steep fall in the counter. Also the open-offer from EDS met with poor response. Hence a section of the market expects a fresh open-offer at a much higher price, as compared to the ruling market price, from EDS shortly.

GMR Infrastructure gained 6.6% to Rs 379.15, under the reckoning that it being an developer of infrastructure projects, will continue to get the 10-year tax benefit under section 80 IA.

Neyveli Lignite surged 6.41% to Rs 57.25, as the Budget raised total outlay for the company to Rs 2007 crore from Rs 945 crore in 2006/07.

Kothari Products surged 3.48% to Rs 566.10, as excise duty on tobacco-free pan masalas has been reduced from 66% to 45% in the Union Budget presented on Wednesday. Kothari Products, the flagship company of the Kothari Group, is a top player in pan-masala and gutkha. The company manufactures and exports ‘Pan Parag’ pan masala, gutkha and parag zarda in India.

The market sell-off on Wednesday was not only due to the Budget. Global factors also played a big role. Moves by the regulator to curb ‘excesses’ triggered a sell-off in global markets. If the global markets stabilise, and there is no big delivery-based selling by FIIs, a sharp short covering rally is on the cards.

The market had come down steeply after presentation of the Union Budget 2007-08 on Wednesday. A hike in dividend distribution tax from 12.5% to 15%, added to the general gloom. That equities worldwide were weak also did not help. Nifty March futures settled at 3,726 on Wednesday, a discount of 19.30 over the spot Nifty closing of 3,745.30.

A recovery in key Indian ADRs, and a recovery in the US market may support the market today. However, the upside may be capped due to FII-sales. Among key Indian ADRs, HDFC Bank's ADR jumped 5% to $66.36 and ICICI Bank's ADR rose almost 5% to $38.36. Infosys' ADR gained 1.4% to $54.26, while Tata Motors' ADR gained 2.5% to $18.51.

Meanwhile, Chinese stocks, which have been extremely volatile this week, fell modestly on Thursday morning amid heavy trading, hit by profit-taking and weak performances by other key markets.

The benchmark Shanghai Composite Index fell 2.91%, to 2,797.19. On Tuesday, the Shanghai Index tumbled nearly 9%, triggering a sell-off in global markets, before rebounding almost 4% on Wednesday.

The Hang Seng Index was down 1.55%, while the Japanese Nikkei 225 Index was down 0.86%.

As per provisional data, FIIs pressed huge sales to the tune of Rs 1932 crore on Wednesday, the day when the Sensex tanked 541 points. They were net sellers to the tune of Rs 415.70 crore on Tuesday (27 February 2007) compared to an outflow of Rs 582.10 crore on Monday (26 February 2007).

US stocks bounced back on Wednesday. Their recovery on Wednesday hit its stride after Federal Reserve Chairman Ben Bernanke told Congress there did not appear to be a single trigger for Tuesday's global stock slump. The Dow Jones industrial average rose 52.39 points, or 0.43%, to end at 12,268.63. The Standard & Poor's 500 Index gained 7.78 points, or 0.56%, to finish at 1,406.82. The Nasdaq advanced 8.29 points, or 0.34%, to close at 2,416.15.

Crude oil fell from a two-month high in New York, as traders sold contracts to book profits from the past week. Crude oil for April delivery declined as many as 36 cents, or 0.6%, to $61.43 a barrel in after-hours trading on the New York Mercantile Exchange. Crude Oil Futures closed at $61.79 a barrel yesterday, the highest since 22 December 2006.

In London, Brent oil for April settlement declined as many as 37 cents, or 0.6%, to $61.52 a barrel in electronic trading on the ICE Futures Exchange.

Budget Analysis - ASK RJ, Angel, Religare, Morgan Stanley

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Thanks Nikhil

Sharekhan Commodities Buzz dated March 01, 2007

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Sharekhan Highnoon dated March 01, 2007

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Kotak- Union Budget Analysis

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SSKI Emerging Stars Conference (2007) Notes

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Anagram's Analysis of Union Budget 2007-08

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Sharekhan Eagle Eye (equities) & Derivatives Info Kit for March 01, 2007

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Citigroup - India Construction: Section 80 I (A) Boogey: Back to Haunt Construction

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Anand Rathi - Daily Strategist

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Anand Rathi - The First Call (Daily Technical Note)

Nifty and Sensex have exhibited bearish candlesticks.

Technically, one may use the level of 3650 (Nifty) and 12600 (Sensex) as the stop loss level .

Nifty faces resistance at 3900 and Sensex at 13300.

BSE Smallcap and BSE Midcap Indices have exhibited a bearish candlestick.

CNX IT has exhibited a bearish candlestick.

In the Punter's zone we have a sell in Mphasis - Bfl & Buy Hdfc Bank & Bharti Airtel.

In the technical zone we have a Buy in ACC , Icici Bank & Grasim Ind.

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Anand Rathi - Budget 2007

Fiscal deficit is down to 3.7% (FY07RE) and is further expected to improve to 3.3% (FY08BE). This improvement is more of a reflection on growth rather than fiscal management. Despite strong collection growth, the deficits have increased in absolute numbers. Moreover, it is revenue vs. capital expenditure; non-plan vs. plan expenditure that has contributed to the deficits. A trend that is yet to get arrested to instill confidence on fiscal management.

Growth vs. Inflation will remain a debate as inflation containment measures are muted. Principally this is good as any fiscal related control on inflation normally is counter productive.

Encouraging facets of the budget are -

  • Growth - Sustainable, High and Equitable.
  • Emphasis on social sector, agriculture and sustainable growth
  • Continuity remains the key theme with major items remaining untouched. Subtle changes are much better than drastic shifts

Disappointing as far as industry wish list was concerned. Moreover, with excellent collection growth backed by economic growth actually presents and excellent opportunity to bring down taxes and / or enhance key bottlenecks in systems like infrastructure. Sadly once again this budget misses on these opportunities. Understandable so, on account of coalition politics.

Overall a balanced and a neutral budget.

Impact- Some of the measures taken are negative for cement, technology and construction sector. However, the reaction of equity markets was far more than warranted. This gives an good value buying opportunities for long-term investors.

  • Key picks - Cement (Guj. Ambuja, Shree Cement, Orient Paper); Technology (TCS, Polaris); Construction (L&T, IVRCL, HCC)

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Market may recover

The market fell steeply after the presentation of the Union Budget 2007-08 on Wednesday (28 February). The government raised taxes for the favourite IT sector. The imposition of taxes on employee stock options (ESOPs) and a hike in dividend distribution tax from 12.5% to 15% added to the general gloom. That equities worldwide were weak did not help. Nifty March futures settled at 3,726 on Wednesday, a discount of 19.30 over the spot Nifty closing of 3,745.30.

A recovery in key Indian ADRs, and a recovery in the US market may support the market today. However, the upside may be capped due to FII-sales. Among key Indian ADRs, HDFC Bank's ADR jumped 5% to $66.36 and ICICI Bank's ADR rose almost 5% to $38.36. Infosys' ADR gained 1.4% to $54.26, while Tata Motors' ADR gained 2.5% to $18.51.

As per provisional data, FIIs pressed huge sales to the tune of Rs 1932 crore on Wednesday, the day when the Sensex tanked 541 points. They were net sellers to the tune of Rs 415.70 crore on Tuesday (27 February 2007) compared to an outflow of Rs 582.10 crore on Monday (26 February 2007).

US stocks bounced back on Wednesday. Their recovery on Wednesday hit its stride after Federal Reserve Chairman Ben Bernanke told Congress there did not appear to be a single trigger for Tuesday's global stock slump. The Dow Jones industrial average rose 52.39 points, or 0.43%, to end at 12,268.63. The Standard & Poor's 500 Index gained 7.78 points, or 0.56%, to finish at 1,406.82. The Nasdaq advanced 8.29 points, or 0.34%, to close at 2,416.15.

Key Asian markets remained weak on Thursday. Key benchmark indices in China, Hong Kong and Japan were down between 0.2 - 1.7%.


The Day After...look for a way

When faced with a challenge, look for a way, not a way out.

It's a little to look for a way out. If you do so you may return at peak to make the same mistakes. So hang around and let the dust settle. If you thought short covering will save the day today, we have to contend with a weak global sentiment, especially in Asia. Key Markets in Tokyo, Hang Seng and Shanghai are down this morning. Oil is hovering above $61 per barrel mark. There is some relief in terms of gains in US and Latin American indices. However, that's hardly any solace when one considers the uphill task that the bulls face after the ferocious February. FIIs were heavy sellers in the cash segment yesterday. Cues from the F&O segment are also not encouraging.

All in all, we are looking at another day with the usual intra-day gyrations. There may be some short-covering led bounce back but again don't get fooled. Remain alert as we have the sun outage later next week which sets in boredom to say the least.

Concerns about inflation and rising interest rates continue for a while before we see any improvement on this front. The much dreaded hike in STT didn't come about nor did the rumoured come back of Long-Term Capital Gains tax. Still, the budget doesn't have much to lift the market from its current levels. If anything, the FM has sprung some nasty surprises for IT, Cement, Construction, Retail and a few other sectors. The upping of dividend distribution tax coupled with the increase in education cess are among the other negatives from the budget.

Aftek and ESG of Germany will together announce a joint venture later in the day. Salzer Electronics board is meeting to consider and approve the proposal of private placement. Karuturi Networks is expected to consider bonus shares in the ration of 1:1. Esab will declare its results today.

US stocks recovered on Wednesday from the previous day's massacre, helped by comments from Federal Reserve Chairman Ben Bernanke.

Trading was volatile. Stocks rose after the opening bell and then reversed course, only to turn higher when Bernanke commented on the market in his appearance on Capitol Hill. He told members of Congress that US financial markets appear to be working well and are functioning normally, one day after the Dow posted its biggest one-day point loss since the market reopened after the Sept. 11 attacks.

The Dow Jones rose 52.39 or 0.4% to 12,268.63, but finished off its session high. The broader S&P 500 index added 7.78 or 0.6% to 1,406.82 and the Nasdaq Composite index advanced 8.29 or 0.3% to 2,416.15.

US light crude oil for April delivery rose 33 cents to settle at $61.79 a barrel on the New York Mercantile Exchange. The front-month contract was 20 cents higher at $61.59 a barrel in extended trading in Asia.

Treasury prices, which soared Tuesday as equities plunged, retreated. The yield on the benchmark 10-year note rose to 4.56%, up from 4.51% late on Tuesday. The dollar rebounded against the euro and the yen.

Gold futures closed with a loss of nearly $15 an ounce. Gold futures for April delivery dropped as much as $23.20 during Wednesday's session to a more than two-week low of $664 an ounce in New York. It closed at a one-week low of $672.50, down 2.1%, or $14.70.

European shares saw their second day of sharp selling. The German DAX Xetra 30 closed down 1.5% at 6,715.44, the UK's FTSE 100 declined 1.8% to 6,171.50 and the French CAC-40 slipped 1.3% to 5,516.32.

Latin American markets finished higher. Brazil's Bovespa index rose 747 points, or 1.7%, to 43,892.31. Mexico's IPC gained 220 points, or 0.8%, to 26,638.95; and Chile's IPSA surged 3%. But Argentina and Venezuela extended losses.

China's stocks dropped on Thursday amid worries about valuations after the rally to record high last week. Industrial & Commercial Bank of China and Bank of China led the decline.

The Shanghai and Shenzhen 300 Index, which tracks yuan- denominated A shares listed on China's two exchanges, declined 17.14, or 0.7 percent, to 2527.43 as of 11:05 a.m. local time. The measure added 3.5 percent yesterday, after plunging 9.2 percent two days ago. It has climbed 24 percent this year.

The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, dropped 1.4 percent to 2840.39. The Shenzhen Composite Index, which covers the smaller one, lost 0.2 percent to 735.13.

The Morgan Stanley Capital International Asia-Pacific Index fell 0.7% to 143.20 at 11:46 a.m. in Tokyo. It slumped 3% yesterday, the most since June 13, after a Feb. 27 plunge in Chinese shares triggered a worldwide selloff.

Japan's Nikkei 225 Stock Average dropped 215 points to 17,388, while the Topix Index slipped 0.8%. Indexes gained in Singapore, the Philippines and New Zealand. Others markets fell, including in Taiwan, which was closed yesterday for a holiday. South Korea is shut today.

Market Watch & Insider Trades

Insider Trades:
Gammon India Ltd: Franklin Templeton Mutual Fund has sold in open market 744712 equity shares of Gammon India Ltd on 20th February, 2007.

Alstom Projects India Limited: Reliance Vision Fund - Scheme of Reliance Mutual Fund has purchased from open market 48000 equity shares of Alstom Projects India Limited on 26th February, 2007

Market Volumes:
The turnover on NSE was up by 55% to Rs126.8bn. BSE Technology index was the major loser and lost 4.65%. BSE Metal index (down 4.64%), BSE Bank index (down 4.28%) and BSE Consumer Durable index (down 3.57%) were among the other major losers. However, BSE FMCG index gained 0.48%.

Volume Toppers:
ITC, IFCI, Gujarat Ambuja, SAIL, IVRCL, PFC, Ashok Leyland, India Cement, NTPC, Reliance, Nagarjuna Construction, TTML, Satyam, Tata Steel, Bajaj Hindusthan, HLL and TV Today.

Lower Circuit Filters:
Crisil, GMR Industries, Aftek, Nucleus Software, Goldstone Technology, Atlanta, Tanla, PSTL, Shree Ashtavinyak, Autoline Industries, Saksoft, Vyapar Industries, Ananat Raj Industries, Patel Engineering, Shree Precoated, Ansal Housing, Aurionpro Solutions, Country Club, Donear Industries, Gemini Communication, KS Oils, McNally Bharat, BF Utilities and Taneja Aerospace.

Delivery Delight:
ABG Shipyard, Alstom Projects, Bajaj Hindustan, Apollo Hospitals, Balrampur Chini, BPCL, Colgate, GAIL, Gitanjali Gems, Hindustan Motors, ITC and Navneet Publications.

Major News Headlines:

Maruti to raise prices from 15th March

India Cements to give 1 share for every 5 held in Visaka Cement

Moser Baer subsidiary ties up with Deutsche Solar

Tech Mahindra forms partnership with Tazz Networks

Brokers Recommendation:
JSW Steel - Outperformer from HDFC Secs with target of Rs560.

Long Term investment:
Jain Irrigation

From the Research Desk - Budget Impact

Budget Impact


Dividend distribution tax raised to 15% from 12.5%: negative for all dividend paying companies.

Dividends distributed by money market mutual funds and liquid mutual funds will now be paying dividend distribution tax at 25%.

Levy of additional 1% cess for funding of secondary and higher education.

Cement - Negative

Increasing excise duty from Rs400 to Rs600 for price above Rs190 per bag and reducing from Rs400 to Rs350 is a negative as cement price per bag in most of the places is above Rs190 at present. With demand strong we believe the increase in the duty would be largely passed on, but continuous efforts by the Government to curb the price increase and reduce the profitability of the industry is visible.

Increase in allocation for Bharat Nirman, Rural housing and roads is positive for the industry from demand side.

IT – Negative

Higher education allocation by 34.2% to Rs32,352cr to be positive for IT education companies like NIIT, Aptech, Educomp Solutions, etc.

Almost doubling of e-Governance outlay both at centre and state level to benefit companies like Vakrangee to major extent and TCS and other Government focused companies to some extent

MAT to be applied to IT companies to 11.2% on book profits

Inclusion of ESOPs under the FBT net negative for the sector

Non-extension of STP benefits beyond 2009 negative especially for medium & smaller sized IT companies.


Will the dust settle on Budget?

The bulls were completely taken out as markets witnessed blood bath on the D-Street. Sluggish cues from International markets compelled the key indices to open with a negative bias. The indices further dropped tremendously after Finance Minister P Chidambaram announced a tax increase on dividends distribution from 12.5% to 15% in his budget proposal. The markets witnessed wild gyrations throughout the day as benchmark Sensex swung nearly 500 points and NSE Nifty swung over 200 points. The Cement, Construction and Technology stocks were the major losers dragging the benchmark index to hit a low of 12800.1. Finally, the 30-share benchmark Sensex slumped 540 points to close at 12938. NSE Nifty fell 148 points to close at 3745.

Technology index was the major loser and lost 4.65%. Others like Bank, Auto and Metal followed suit each falling over 3.5% each. Gujarat Ambuja, Satyam Computer and Wipro were the major losers among the 50-scrip’s of NSE Nifty. However, ITC, GAIL and Colgate were among the major gainers.

Hindustan Motors paced ahead by 6% to Rs40 after the automaker announced that it would develop a software township and an auto parts complex on surplus land around its factory in the eastern state of West Bengal. The scrip touched an intra-day high of Rs43 and a low of Rs35 and recorded volumes of over 68,00,000 shares on NSE.

Educational stocks were also on the receiving end. The Government proposed to increase the allocation for school education by about 35%. In 2007-08, an amount of Rs231.42bn has been allocated as against Rs171.33bn in 2006-07. Educomp Solutions ended flat at Rs900. However Aptech lost over 3% to Rs213 and NIIT slipped by 3.7%to Rs669.

Technology stocks also slipped heavily after the government said it will extend a minimum alternate tax on software companies that enjoyed tax exemptions. Heavy weights like Satyam Computer, Wipro and Infosys were among the major losers. Polaris plunged by over 12% to Rs174, Moser Baer lost by over 10% to Rs329 and HCL-Tech declined over 9% to Rs600 were the major losers among the Mid-Cap stocks.

Metal stocks lost their shine. National Aluminum lost nearly by 6% to Rs210, Tata Steel was down by 5.7% to Rs442, SAIL slipped nearly 5% to Rs108, Hindalco declined 3.1% to Rs139 and Sterlite Industries lost over 6% to Rs469.

Auto stocks were in reverse gear. Maruti plunged over 5% to Rs841, Tata Motors was down by 5% to Rs782, M&M slipped 4.3% to Rs811 and Bajaj Auto lost 4% to Rs2618.

However, FMCG index was the only gainer and gained 0.48%. Frontline stock ITC rose 4% to Rs171 after the government announced that it would increase the excise tax it levies on cigarettes by 5% in its budget for the year starting April 1, Marico rose over 2% to Rs60 and Colgate added 0.75 to Rs322.

Market may resume weak

Market lost more than 700 points in last couple of days on the back of steep fall in Chinese stock market and disappointing budgetary proposals. Also mixed Asian markets in the early trades may put pressure on the local indices. FII turning net sellers for last few sessions is the another cause of concern. However, overnight gains in the US markets may lift the investors sentiment. Among the indices, the Nifty may get support at 3670 and could test higher levels in the range of 3850. The Sensex has a likely support at 12800 and may face resistance at 13400.

US indices registered moderate gains on Wednesday on Fed chief Bernanke assuring investors that market is working well and the recent selloff hasn't altered the Fed's view on U.S. economic growth. While the Dow Jones gained 52 points to close at 12269, the Nasdaq ended 8 points higher at 2416.

Indian ADRs had a mixed outing on the US bourses. Patni computers fell sharply by 5% while, Satym Computers, Dr Reddy's, Wipro, MTNL dropped over 1% each while Rediff lost around 1%. While HDFC bank and ICICI Bank jumped by 5% and Infosys, Tata Motors and VSNL gained around 1-2%.

Crude oil prices in the global market moved up, with the Nymex light crude oil for April series rising by 25 cents at $61.39 a barrel. In the commodity segment, the Comex gold for April delivery tumbled $14.70 to settle at $672.50 an ounce.

Investsmart - Morning Call

Market Grape Wine :

In House :

Nifty at a support of 3690 & 3650 levels with resistance at 3810 & 3835
levels .

Buy : Steel stocks at dips

Buy : GACL above 115 s/l 114

Out House :

Sensex at a support of 12800 , 12786 & 12662 levels with resistance at
13131 & 13254 levels .

Maintain strict stop loss as markets to be very choppy and volatile .

Buy : RIL & RelCap at dips

Buy : ONGC & Gail

Buy : WelspunGuj & JainIrri

Buy : Sail & JSW at dips

Buy : NDTV & Tvtoday at dips

Buy : AbanLLoyd

Buy : Adalbs , Gitanjali & Glenamrk

Dark Horse : RIL ,Gail , Ongc , Infy , Gitanjali , NDTV & IFCI

Thanks Yash

Emkay - Morning Notes, Union Budget Analysis

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Anagram - Daily Call

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Major Global Macro Events - Chetan Parikh

“Today's managers, many of whom are alumni of the original global macro fund managers, earned their stripes during the ensuing crises and events. While Keynes had his 1929 event to learn about the positive and negative effects of trading on leverage, which he subsequently incorporated into his trading style and translated into future success, today's managers had the 1987 stock market crash, the sterling crisis of 1992, the bond market rout of 1994, the Asia crisis of 1997, the Russia/LTCM crisis of 1998, and finally the dot-com bust of 2000. (See Figure 1) The ways that today's managers look at markets, control risk, and manage their businesses include lessons learned through these important events.

Figure 1 Major Global Macro Events since 1971

The Stock Market Crash of 1987

Although the U.S. stock market crash of October 1987 is now a mere blip on long-term stock market charts (see Figure 2), as indexes fully recovered only two years later, the intensity of Black Monday for traders who lived through it has certainly left its mark. Most notably, the notions of liquidity risk and fat tails were introduced to the wider investment community without mercy. Entire portfolios and money management businesses were obliterated on that day as margin calls went unfunded. Indeed, even so-called "portfolio insurance" hedges didn't work as the futures and options markets became unhinged from the cash market.

Figure 2 S&P 500 Index, 1980-2005

Yra Harris (Praxis Trading) explains in his interview later in this book what he saw that day on the floor of the Chicago Mercantile Exchange:

It was eerie and scary because you just didn't know the extent if everything. People were clearly hurting badly but you just didn't know how badly. I've traded through a lot if devaluations and debacles but I've never seen as many people pulled off the floor by clearinghouses as I did that day. The pit was practically empty, which actually turned into a great opportunity to trade the S&Ps. I went into the S&P pit and starting making markets because nobody else was. Spreads were so unbelievably wide that it was pretty easy to make money just scalping around. Honestly, I couldn't help it.

Global macro managers from the equity stream, including George Soros, got hurt in the 1987 crash. Just prior to the crash, Fortune magazine ran a cover story entitled, "Are Stocks Too High?" in which Soros disagreed with the notion. Days later, Soros lost $300 million as stocks collapsed (yet Soros Fund Management still ended the year up 14 percent). Meanwhile, Tiger Management posted its first down year (-1.4 percent) only one year after an Institutional Investor article, noting Tiger's 43 percent average annual returns since inception in 1980, sparked the next wave of hedge fund launches.

For global macro traders from the commodities stream, however, the 1987 crash served as a windfall event. Paul Tudor Jones in particular was elevated to star status when he famously caught the short side of the stock market and the long side of the bond market by identifying similarities between technical trading patterns in 1987 and the great crash of 1929. (See Figure 3) Jones's Tudor Investment Corporation returned 62 percent for the month in October 1987 and 200 percent for the year.

The year 1987 also marked the introduction of a new Federal Reserve chairman in Alan Greenspan. Greenspan came into office in August 1987 and his first act a few weeks later was to raise the discount rate by 50 basis points. This unexpected tightening created volatility and uncertainty in the markets as traders adjusted to the style of a new Fed chairman. Some argue that Greenspan's rate hike was actually the cause of the subsequent equity market meltdown a month-and-a-half later. Immediately after the stock market crash, Greenspan flooded the market with liquidity, initiating a process that came to be known as the Greenspan put." The Greenspan put is an implicit option that the Fed writes anytime equity markets stumble, in hopes of bailing out investors.

Figure 3 Dow Jones Industrial Average: The Late 1920s versus the Late 1980s

Former Federal Reserve chairman William McChesney Martin famously observed that the job of a central banker is to "take away the punch bowl just when the party is getting started." Alan Greenspan, on the other hand, seemed to interpret his role as needing to intervene only as the partygoers are stumbling home. As he has claimed, bubbles can only be clearly observed in hindsight, such that the role of a central banker is to soften the impact of the bubble's bursting rather than to take away the fuel for the party.

Black Wednesday 1992

The term global macro first entered the general public's vocabulary on Black Wednesday, or September 16, 1992. Black Wednesday, as the sterling crisis is called, was the day the British government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM)-a mere two years after joining-sending the currency into a free fall. The popular press credited global macro hedge fund manager George Soros with forcing the pound out of the ERM. As Scott Bessent (Bessent Capital), head of the London office of Soros Fund Management at the time, noted, "Interestingly, no one had ever heard of George Soros before this. I remember going to play tennis with him at his London house on the Saturday after it happened. It was as if he were a rock star with cameramen and paparazzi waiting out front."

The ERM was introduced in 1979 with the goals of reducing exchange rate variability and achieving monetary stability within Europe in preparation for the Economic and Monetary Union (EMU) and ultimately the introduction of a single currency, the euro, which culminated in 1999. The process was seen as politically driven, attempting to tie Germany's fate to the rest of Europe and economically anchor the rest of Europe to the Bundesbank's successful low interest rate, low inflation policies.

The United Kingdom tardily joined the ERM in 1990 at a central parity rate of 2.95 deutsche marks to the pound, which many believed to be too strong. To comply with ERM rules, the UK government was required to keep the pound in a trading band within 6 percent of the parity rate. An arguably artificially strong currency in the United Kingdom soon led the country into a recession. Meanwhile, Germany was suffering inflationary effects from the integration of East and West Germany, which led to high interest rates. Despite a recession, The United Kingdom was forced to keep interest rates artificially high, in line with German rates, in order to maintain the currency regime. In September 1992, as the sterling/mark exchange rate approached the lower end of the trading band, traders increasingly sold pounds against deutsche marks, forcing the Bank of England to intervene and buy an unlimited amount of pounds in accordance with ERM rules. Fears of a larger currency devaluation sent British companies scrambling to hedge their currency exposure by selling pounds, further compounding pressures on the system.

In an effort to discourage speculation, UK Chancellor Norman Lamont raised interest rates from 10 percent to 12 percent, making the pound more expensive to borrow and more attractive to lend. However, this action only served to embolden traders and further frighten hedgers, all of whom continued selling pounds. Official threats to raise rates to 15 percent fell on deaf ears. Traders knew that continually raising interest rates to defend a currency during a recession is an unsustainable policy. Finally, on the evening of September 16, 1992, Great Britain humbly announced that it would no longer defend the trading band and withdrew the pound from the ERM system. The pound fell approximately 15 percent against the deutsche mark over the next few weeks, providing a windfall for speculators and a loss to the UK Treasury (i.e., British taxpayers) estimated to be in excess of £3 billion. (See Figure 4)

Figure 4 Sterling/Mark and UK Base Rates, 1992

It was reported at the time that Soros Fund Management made between $1 billion and $2 billion by shorting the pound, earning George Soros the moniker "the man who broke the Bank of England." But he was certainly not alone in betting against the pound. While he may have borne a disproportionate amount of the criticism because of his significant gains, the government's own policies are believed by many to have been the root cause of the problem, the speculators merely a symptomatic presence.

The pound eventually traded as low as 2.16 deutsche marks in 1"95 but then rose as high as 3.44 in 2000 as the British economy recovered from recession and Germany suffered from the negative effects of euro integration. (See Figure 5) Some credit today's strength in the British economy with the interest rate and currency flexibility afforded by its position outside of the euro system. This is especially striking when the United Kingdom's economic growth over the last decade is compared to the growth rates of formerly strong euro area countries such as Germany and France.

Yra Harris amusingly claims in his interview that Great Britain should erect a statue of George Soros in Trafalgar Square as an expression of gratitude for taking the pound out of the ERM. Bessent adds, "A lot of credit should go to the UK officials . . . they knew to fold their hand quickly. UK Chancellor Norman Lamont and Prime Minister John Major suffered short-term humiliation for long-term good. I mean, look at the muddle France and Germany are still in."

Figure 5 Sterling/Mark, 1990-2005

Following the sterling crisis, the next systemic event for the global macro community was the bond market rout of 1994, but this time, the outcome was not profitable.

Bond MarketRoutof1994

As the euro project gathered political steam throughout the late 1980s and early 1990s, convergence trades-trades profiting from the convergence of various currencies and bonds toward a single currency and interest rate-became the dominant theme in European foreign exchange and fixed income markets. The early 1990s especially witnessed several strong years in the European fixed income and currency markets. Global macro traders at banks and hedge funds jumped on the trend along with relative value traders and trend followers, who were all heavily long European bonds. Leveraged positions were predominantly taken in the bonds and currencies of the weaker, high interest rate eurozone countries which, after the United Kingdom opted out of the ERM, were Italy and Spain.

Then, in February 1994, Fed Chairman Greenspan surprised the markets by raising overnight U.S. interest rates from 3 percent to 3.25 percent, beginning a series of hikes that served to abruptly end the early 1990s' period of easy money. Given the sizeable leveraged positions that had built up in the falling interest rate environment pre-1994, especially in the budding derivatives market, this unforeseen reversal of trend led to a generalized market sell-off. The 10-year U.S. government bond yield moved from 5.87 percent to 7.11 percent three months after the first hike, and most other markets also suffered trend reversals and declines. Likewise, the European bond trade that had worked so well until this point began to unravel. The sell-off was further compounded as margins were called, leveraged positions unwound, and continued price declines created a vicious cycle of forced selling. (See Figure 6 )

Figure 6 Yields: U.S. 10-Year Treasury, UK 10-Year Gilt, and German 10-year Bund, 1993-1994

Corporations on the receiving end of Wall Street's derivative prowess, such as Procter & Gamble and Gibson Greetings, suffered major losses as their hedges went against them; Orange County, California, the wealthiest county in the United States at the time, declared bankruptcy as interest rate derivative structures imploded; and several well-known global macro funds either closed or went into hiding. Indeed, 1994 was the only down year for the HFR global macro index, which lost 4.3 percent.

Asia Crisis 1997

For most of the 1990s many Southeast Asian countries had currency regimes that were linked to the U.S. dollar (USD) through trading bands that were set and managed by the local central banks. For the first half of the 1990s the USD was falling, improving the competitiveness of the Southeast Asian countries. Then, in 1995, the USD started to appreciate on a trade-weighted basis and especially against the yen, where it appreciated by more than 50 percent from April 1995 to January 1997. Due to their link to the USD, the Southeast Asian currencies appreciated in kind, slowly eroding their competitive advantage. (See Figure 7)

The USD link allowed local Southeast Asian borrowers to access cheaper funds offshore as U.S. interest rates were below local rates and their currencies were essentially pegged. They also borrowed a lot from Japan where interest rates were less than 1 percent and, post-1995, the Japanese clearly had a policy to weaken their currency. Given their confidence in the stable currency regime, Southeast Asians deemed such cross currency borrowing as largely riskless. But expanding current account deficits, along with a rising competitive environment, most notably from China, and a strengthening USD, created pressures in the managed exchange rate system. Towards the middle of 1997, the Japanese banks were forced to increase their asset bases and were thus less inclined to roll over short-term debts. This drying up of liquidity for the Southeast Asian borrowers, coupled with a sudden rally in the yen in May 1997, brought to light some of the strains in the system.

Figure 7 Japanese Yen, 1990-1998

As the risks became increasingly apparent, locals began to hedge their foreign exchange exposure, which meant heavy selling of local Southeast Asian currencies. As pressures on the system built, it became more difficult and more expensive for the local central banks to defend their currency regimes when their exchange rates approached the lower ends of the trading bands.

By July 1997, the Central Bank of Thailand saw its foreign currency reserve position dwindle in a futile effort to defend their currency regime and was left with little choice but to abandon the trading band. Without central bank support, the Thai baht immediately fell by 23 percent against the USD (See Figure 8) Lenders to Southeast Asian countries panicked en masse, withdrawing capital from the region or hedging their currency risk, which further depressed the Asian currencies. At the same time, locals borrowing in U.S. dollars and yen but getting paid in local currency rushed to hedge their worsening foreign exchange position. This led to a systemic sell-off across all Southeast Asian currencies, stock markets, and other assets linked to the former "Asian Tigers," creating a contagion-like" effect. Foreign investors rushed to pull their capital from the region without regard to specific country situations. The Thai baht eventually lost more than 50 percent of its value with other Southeast Asian currencies and stock markets sharing a similar fate. It was like a classic run on the bank, but in this case it was small economies and an entire region.

Figure 8 Thai Baht, 1997

Many economists and institutions at the time blamed the Asia crisis on I the openness of the global capital markets and the herd mentality of speculators. Malaysia's prime minister, Dr. Mahathir Mohamad, publicly blamed George Soros for the economic ills that Malaysia suffered following the crisis and even considered currency speculation a crime. He shut down his country's economy to so-called hot money by instituting draconian capital controls and fixing the Malaysian ringgit to the USD at 3.80. (See Figure 9) As Scott Bessent recalls, it "was slightly worrying [because] it was the first time that someone had actually stopped paying lip service and actually shut down an economic system."

While Soros Fund Management returned 11.4 percent for the month of July 1997 largely from shorting the Thai baht, if profiting from the collapse of the Southeast Asian market deserves blame, then Julian Robertson should have received the lion's share of attention. His Tiger Management made $7 billion in profit after catching Asia crisis trades across currency, commodity, and equity markets. Going into July 1997, the fund's returns were approximately flat for the year on an asset base of $10 billion but after a strong finish, Tiger completed the year up 70 percent.

Figure 9 Malaysian Ringgit, 1998-1998

To say that speculators caused the Asia crisis, though, would be oversimplifying the situation. More likely the local borrowers, who built up excessive foreign exchange exposures prior to 1997 when the system was still largely stable, were also largely to blame. As such, the Southeast Asian governments merit responsibility for running ill-conceived policies that allowed excessive foreign currency borrowing to build up in the first place.

Russia Crisis 1998

The Russia crisis, according to some, was essentially a continuation of the Asia crisis as the Asian "economic flu" made its way around the globe, causing investors to retrench and reduce exposure to riskier investments such as emerging markets. Prior to 1998, Russia was the darling of the investment community as the large, commodity-rich economy emerged out from under the Iron Curtain. But as foreign investors retrenched and pulled their capital from Russia, the deteriorating situation was compounded again by locals moving money offshore and by less-than-perfect government financial management.

As capital started to flee Russia, successive changing of finance ministers, increases in interest rates to incredibly high levels, and various proposals of international bailout packages were all attempted by the Russian government before it finally capitulated. On August 17, 1998, the government of the Russian Federation and the Central Bank of Russia announced a currency devaluation and a moratorium on 281 billion rubles of government debt. The ruble fell from 6 to the U.S. dollar to 20 (and eventually to over 30 in 2002), while the bonds became almost worthless. The Russian stock market index (RTSI$) collapsed from a high of 570 to 36 during the lead-up to the crisis. (See Figure 10) At the same time, many Russian financial institutions immediately became insolvent. This caused ripples through the world financial system, as many institutions had exposure to Russia that was thought to be hedged through derivative contracts with local Russian banks. Rather than being hedged, these positions became the subject of counterparty credit risk when the Russian banks became insolvent, leaving only the losing side of the trade.

Figure 10 Russian Ruble and Russia Equity Index (RTSI$), 1997-1998

The devaluation of the Russian ruble and simultaneous default of the country's sovereign debt caught many macro managers poorly positioned. It also marked the beginning of the end for the great global macro hedge funds, with 1998 denoting the peak in assets for Soros and Tiger (approximately $22 billion and $25 billion, respectively). George Soros made headlines again by losing between $1 billion and $2 billion on a single day (but yet again managed to finish positive for the year, returning 12 percent to investors) while Julian Robertson also took an estimated $1 billion hit in Russia. Tiger's woes were compounded with large losses in other markets, notably yen carry trades. (See Figure 11)

Figure 11 The Dollar/Yen Carry Trade, 1997-1998

As with most major crises, the Russian event created anomalies in other seemingly unrelated world markets. In this case, as investors dramatically reduced overall exposure to risky assets, they moved their capital into on the- run U.S. government bonds in what was called "a flight to quality." As I a result, spreads between the benchmark U.S. government bonds and all lather risk assets widened dramatically, leading the world to its next financial crisis: Long Term Capital Management.

Long Term Capital Management 1998

Although Long Term Capital Management (LTCM) was not a global macro fund, it is worth mentioning for several reasons. For one, the arbitrage focused fund drifted into global macro trades and its subsequent unwind had ramifications for global macro markets. Two, it offers insights into what can go wrong at a hedge fund, as well as shed light on such important issues as liquidity, risk management, and correlations. And three, almost every interviewee in this book mentions LTCM.

LTCM was started in 1994 by infamous Salomon Brothers proprietary I trader John Meriwether, who hired an all-star cast of financial minds including former Fed vice chairman David Mullins and Nobel Prize winners Robert Merton and Myron Scholes (pioneers in option pricing theory and methodology). LTCM started with $1.3 billion in assets from a who's who list of investors and initially focused on fixed income arbitrage opportunities (which had become more attractive as spreads widened after the bond market rout of 1994). The original core strategy was to bet on the convergence of the spread between "off-the-run" and "on-the-run" bonds, as well as other relative value and arbitrage opportunities, primarily in fixed income. Due to the small spread in these arbitrage trades, the fund was leveraged many times in order to generate the 40-plus percent annual returns it posted for the first few years of its existence.

LTCM's success at exploiting these arbitrages caused assets under management to grow at the same time that the opportunities were disappearing. LTCM was forced to increase leverage to maintain returns as well as allocate risk capital to markets and trades that were beyond its original scope of expertise. Going into 1998, LTCM had $5 billion in assets with notional outstanding positions estimated at well over $1 trillion. At the same time, risk arbitrage trades (bets on mergers and acquisitions), directional positions, and emerging market bets became a larger portion of portfolio risk.

As the summer of 1998 approached, global markets became increasingly unsettled due to a combination of the fallout from the Asia crisis and the hint of trouble in Russia. To exacerbate matters, Salomon Brothers, Meriwether's former employer, decided to exit the arbitrage business, closing out similar positions and causing a widening of spreads in LTCM's trades. Russia's eventual devaluation and default then led to a large-scale reduction in risk appetite and a global flight to quality. Long-term fundamental values were deemed irrelevant by investors, causing a further widening of the spreads on LTCM's arbitrage and relative value trades. (See Figure 12) LTCM's losses escalated to worrisome levels.

Given the leverage and size of LTCM's positions, liquidation was all but impossible. At the same time, LTCM's counterparties knew they were in trouble and at risk of imploding, leading them to hedge their own counterparty risk, further compounding LTCM's mark-to-market woes. To mitigate default-and, some would argue, the potential collapse of the world financial system-the Federal Reserve Bank of New York called a meeting with LTCM's creditors and implemented a bailout package. It was yet another iteration of the Greenspan put.

LTCM was at the forefront of investing at the time and offers insight into some of the failings of risk management systems. Risk management systems based on historical prices are one way to look at risk but are in no way faultless. Financial market history is filled with theoretically low probability or fat tail events. In LTCM's case, its risk systems calculated roughly a l-in-6-billion chance of a major blowup. Ironically, however, one correlation the brilliant minds of LTCM neglected to consider was the correlation I coefficient of positions that were linked for no other reason than the fact hat they were in LTCM's portfolio. In other words, their models didn't provide for the LTCM liquidity premium.

Figure 12 Corporate Spreads to Treasuries, 1994-1999

LTCM was a reminder of the notion that there is no such thing as a risk-free arbitrage. Because the arbitrage positions they were exploiting were small, the fund had to be leveraged many times to produce meaningful returns. This put them at risk to their lenders' financing fees as well as general market liquidity. The problem with liquidity is that it is never there when really needed.

Dol-Com Bust 2000

Chairman Greenspan issued his famous "irrational exuberance" speech on December 6, 1996, warning of the perceived overvaluation of the U.S. stock market. Over the next three years, the stock market did nothing but go up, minus a hiccup during the Russia/LTCM episode, which Greenspan quickly corrected by cutting interest rates by 75 basis points. The rate cuts included a famous intrameeting cut normally reserved for emergencies, despite the fact that the U.S. unemployment rate was 4.5 percent (so much for taking away the punch bowl). Meanwhile, !Tom the famous speech through to March 2000, the broader S&P 500 index doubled while the technology stock-laden NASDAQ quadrupled. (See Figure 13)

Figure 13 Boom! 1996-2000

As such, the returns being produced by global macro hedge funds were no longer as interesting to investors as the 50 to 100 percent or more annual returns being posted by some technology mutual funds. At the same, time, the two largest global macro fund managers struggled with the new momentum-driven paradigm. Robertson and Soros both became vocal naysayers of the tech stock-driven rally. It was widely perceived that dotcom and tech stocks were in a bubble but, as shares rallied ceaselessly, it was all but impossible for many investors to jump on the bandwagon. Indeed, Soros Fund Management flipped its position in late 1999, going from short to long high tech stocks, and in the process converted a 19 percent loss into a 35 percent gain for the year.

Julian Robertson, on the other hand, chose to maintain his core theme of long "old economy" versus short "new economy," which led to further losses in 1999 and 2000 as old economy stocks continued to decline and growth rallied. Eventually, Robertson was forced to close Tiger Management as investor redemptions piled up and assets under management sank from $25 billion to $6 billion. Upon shuttering his fund, Robertson remarked in his final investor letter, "As you have heard me say on many occasions, the key to Tiger's success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much." Ironically, Tiger's final month in operation, March 2000, coincided with the absolute top of the tech stock bubble, after which Robertson's investment thesis would have proven a winner. (See Figure 14)

Meanwhile, Soros's long tech stocks position that had been rewarded so handsomely in late 1999 and early 2000 turned viciously against him after March of that year. Down 22 percent by April 2000, Soros announced plans to change the nature of his Quantum Fund to a lower-risk vehicle dubbed Quantum Endowment. Soros remarked at the time, "We have come to realize that a large hedge fund like Quantum Fund is no longer the best way to manage money. Markets have become extremely unstable and historical measures of value at risk no longer apply”.”

Figure 14 Bust! 2000-2003